Wynnstay boosts earnings despite input costs

Wynnstay (WYN) notched up its 18th consecutive year of dividend increases, while registering multi-year highs in statutory profits and earnings in the 12 months through to 31 October. On an underlying basis, profits were 37 per cent to the good at £11.4mn, driven by what chief executive Gareth Davies describes as “strong farmgate prices and the lifting of uncertainties around Brexit”. Both business strands – the agriculture and specialist agricultural merchanting divisions – registered double-digit revenue growth, as a degree of predictability returned to farming markets.

The specialist agricultural products supplier had to contend with the impact of ongoing disruption brought about by the pandemic, including rising input costs across the board. A review of Wynnstay’s results leaves you in no doubt as to why grocery prices are ballooning, but commodity price inflation appears to have been offset by increased seed volumes and further penetration in key feed markets.

Wynnstay benefited from strengthening volumes in the autumn planting season, along with a recovery in harvest tonnages and yields as the rural economy groaned back into life. Price inflation was a recurring theme, with margins under pressure within the agriculture division. The Glasson fertiliser blending operation benefited from a “three-fold increase in selling prices towards the end of the financial year”, as prices for natural gas – the primary input in ammonium nitrate – soared during 2021. The ability to pass through costs is clearly a key determinant in the level of profitability.

The fact that the UK produces less than 60 per cent of the food it consumes presents a long-term opportunity for the sector, especially now that the Russia-Ukraine situation demonstrates how tight global grain markets can become overnight. And after a period of uncertainty in the sector, the post-Brexit UK Agriculture Act has provided clarity over the level and nature of future financial support to farmers. Defra has also just launched the UK Agriculture Partnership, a new forum designed to improve collaborative working on shared issues facing the agricultural sector. A spot of joined-up thinking may be overdue given that many farmers remain under severe financial pressure due to the ongoing labour crisis in meat processing plants across the country.

Wynnstay's balance sheet remains as robust as ever, with net assets on the rise and the turnaround in agricultural volumes reflected in significant increases in inventories and trade receivables. Yet the shares trade at 14 times FactSet consensus earnings (ex-cash), and at a relatively modest 13 per cent premium to net assets. Throw in a forward yield of 2.8 per cent and it’s not difficult to appreciate the investment rationale. Buy.

Last IC view: Hold, 330p, 28 Jun 2019

Read Simon Thompson’s appraisal of Wynnstay in his 2021 Bargain Shares Portfolio